Australia: The Supreme Court of NSW weighs in on market-based causation

A recent decision of the Supreme Court of NSW in Re HIH Insurance Limited (In liquidation) [2016] NSWSC 482 has vindicated proponents of indirect or "market-based" causation Although there have been a number of recent decisions that have (in obiter) provided tacit approval of indirect causation, this decision is the first one to approve of, and apply, market-based causation.


These proceedings were comprised of a number of separate claims by plaintiffs who had acquired shares in HIH Insurance Limited (HIH), an ASX listed company that was placed into liquidation in 2001. Each of the plaintiffs alleged that:

  • HIH engaged in conduct that was misleading and deceptive or likely to mislead or deceive by overstating its operating profit and financial results; and
  • as a consequence of this conduct the plaintiffs purchased shares at inflated prices, causing them to suffer loss.

The plaintiffs lodged proofs of debt in respect of these claimed losses and commenced proceedings when their proofs were not admitted by the liquidators and scheme administrators of HIH and its subsidiaries (the defendants). The defendants admitted that HIH had engaged in misleading and deceptive conduct, however, they denied that this conduct caused the plaintiffs' loss.

The crucial issue was whether the plaintiffs were required to prove that they directly relied on the misrepresentations made by HIH. The plaintiffs did not seek to prove that they were induced to purchase HIH shares by the relevant conduct. Rather, the plaintiffs contended that it was sufficient that they acquired shares on the ASX at the then market price in circumstances where that price was artificially inflated by the misrepresentations in HIH's financial results. This approach, known as indirect causation or market-based causation, is favoured by shareholders in securities class actions.

Was indirect causation available?

His Honour, Brereton J, considered a number of authorities cited in favour of and against indirect causation, and briefly considered (and promptly rejected) the "fraud-on-the-market" theory adopted in the United States, which provides for a rebuttable presumption of reliance where shares are traded in an efficient market. This doctrine was not available to the plaintiffs as Australian law does not authorise any rebuttable presumption of this kind.

Ultimately, his Honour turned to basic principles of causation to find in favour of the plaintiffs. His analysis began with the observation that proof of reliance is not an element of the cause of action in misleading or deceptive conduct claims. However, in claims involving an act of the plaintiff that contributes to the loss, reliance is usually required to establish the causative link between that act by the plaintiff and the contravening conduct. An example would be the purchase of a financial product on the basis of forecasts that are later proved to be incorrect.

Claims of that kind could be distinguished from claims of the kind made by the plaintiffs, in which the chain of causation was complete without any act or omission on the part of the plaintiffs. In these cases, plaintiffs are only required to prove that "somewhere in the chain of causation, someone relied on the contravening conduct"; that is, that someone was deceived by the contravening conduct and that such deception gave rise to the plaintiff's loss.

In order to satisfy this requirement, it was sufficient for the plaintiffs to demonstrate that the contravening conduct by HIH deceived the market in which the shares were traded in circumstances where the plaintiffs had reasonably assumed that the market had set a share price that had been informed by adequate disclosure of HIH's financial position. This did not mean, however, that indirect causation had been established. The plaintiffs were also required to show, by expert evidence or inference, that the contravening conduct distorted the market price.

Quantifying loss

Having found in favour of the plaintiffs on the question of whether they were entitled to rely on indirect causation, his Honour then turned to the related issues of whether indirect causation was proved and the quantification of damages. Both issues were resolved by reference to expert evidence evaluating the extent to which the contravening conduct inflated the share price.

It was held that the contravening conduct did in fact inflate the share price so that indirect causation was established. As such, the plaintiffs were entitled to recover the difference in the price paid and the price they would have paid had the contravening conduct not occurred.


This decision is likely to excite promoters of securities class actions and give greater confidence to shareholders and their lawyers in pursuing claims against companies. However, prospective claimants should be advised to exercise caution for two reasons:

  • First, although it is clear that the burden of proof has been greatly alleviated by the acceptance of market-based causation, plaintiffs are not completely relieved of the requirement to prove that the market relied on the contravening conduct. This may be difficult in circumstances where the market has been affected by other factors unrelated to the contravening conduct, for example catastrophic events such as the GFC.
  • Second, this precedent is not binding and is open to interpretation or disapproval by superior State and Federal Courts or the High Court. In particular, while this decision resolves some questions with respect to securities class actions, it may also create new battlegrounds on issues such as proof of market efficiency (a hotly contested topic in the US) and quantification of damages. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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